Dan Malovany: Making the Tough Choices

June 1, 2011
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Dan Malovany

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When stuck between a rock and a hard place, I find that ranting or throwing a tantrum feels really good, but it rarely accomplishes anything. Maybe that’s why bakers and snack manufacturers — facing volatile commodity and energy prices in a still stumbling economy — are grumbling these days. Maybe that’s because they must make some painful decisions that offer only the lesser of two evils.

Those difficult decisions involve raising prices at a time when consumers are still in bargain-hunting mode. Kraft, Kellogg and General Mills have hiked prices and so has Sara Lee. The choices weren’t easy, but they are necessary, noted Marcel Smits, executive vice-president and CEO, Sara Lee, Downers Grove, IL. “We either take price and then risk short-term volume, or we don’t take enough price and then we risk our long-term margin structure,” he told analysts during a conference call in May.

Sara Lee made the move because the status quo was no longer an alternative. Last August at the beginning of its fiscal year, Sara Lee predicted $200 million of headwind from rising commodity prices, and now it expects a $650 million storm to be brewing by the end of its fiscal year. To cover these costs, the company simply had to accept that it may lose sales volume in the short run.

Additionally, it looks like Sara Lee is getting out of the baking business, except for its namesake cheesecake and frozen desserts. In addition to unloading its North American fresh business to Bimbo Bakeries USA in a deal that should consummate in June or July, Sara Lee might sell its international bakery business, which “has gone in the wrong direction,” Mr. Smits said. On top of price competition in France, its Bimbo business in Spain faces a price war of catastrophic proportions with a competitor dropping its branded pricing below that of private label. It’s refreshing to see that absolute stupidity can be a global marketing phenomenon.

Moreover, Sara Lee may unload its $326 million refrigerated dough business if it doesn’t deliver the high-growth, high-margin financial results, said Jan Bennink, Sara Lee’s chairman, during the conference call.

In the cookie, cracker and snack categories, getting pricing power also is difficult because of stiff competition and deep discounting. Snyder’s-Lance, Charlotte, NC, reported it took price increases on its branded products — first in February, then in May — with good results, Rick Puckett, its CFO, told analysts in May. However, promotional pressure in the branded cookie segment has hurt the company’s efforts to raise prices on its private label side.

To get additional cost efficiencies, bakers and snack manufactures are making strategic investments in equipment that, in many cases, have a return on investment of one year or less, according to Baking & Snack’s capital spending survey, published in February. Specifically, the survey reported 29% of respondents listed economic pressures as the primary reason for making capital investments during the past two years and 22% mentioned offsetting high commodity prices.

Additionally, our survey noted companies investing to diversify their portfolios with new products. In fact, 31% of those surveyed indicated new products primarily drove capital spending, and that survey is now supported by data from Mintel International Global New Products Database, which reported that new bakery products launched in the US rebounded last year. So far this year, the pace continues to head upward. For details, check out “Down, But Not Out” on Page 34 for the latest data on industry trends.

Yes, raising prices to cover rising commodities and energy costs can throw anyone into a tizzy. When bakers are stuck between a rock and a hard place, however, investing in new products and lean manufacturing practices remains the best way to break loose in the long run.

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